Question 1

Huxley Building Supplies' last free cash flow was $1.75 million. Its free cash flow growth rate is expected to be constant at 25% for 2 years, after which free cash flows are expected to grow at a rate of 6% forever. Its weighted average cost of capital WACC is 12%. Huxley has $5 million in short-term investments and $7 million in debt and has 1 million shares outstanding. What is the best estimate of the current intrinsic stock price?

Accepted Answer

A)   $39.58
B)   $40.64
C)   $41.71
D)   $42.80
E)   $44.92F) C) and E)
G) All of the above

Question 2

If D1 = $1.50, g (which is constant)  = 6.5%, and P0 = $56, what is the stock's expected capital gains yield for the coming year?

Accepted Answer

A)   6.50%
B)   6.83%
C)   7.17%
D)   7.52%
E)   7.90%F) B) and E)
G) A) and B)

Question 3

If D1 = $1.25, g (which is constant)  = 4.7%, and P0 = $26.00, what is the stock's expected dividend yield for the coming year?

Accepted Answer

A)   4.12%
B)   4.34%
C)   4.57%
D)   4.81%
E)   5.05%F) All of the above
G) B) and C)

Question 4

According to the nonconstant growth model discussed in the textbook, the discount rate used to find the present value of the expected cash flows during the initial growth period is the same as the discount rate used to find the PVs of cash flows during the subsequent constant growth period.

Accepted Answer

A) True 
 B)False

Question 5

Which of the following statements is CORRECT, assuming stocks are in equilibrium?

Accepted Answer

A)   assume that the required return on a given stock is 13%. if the stock's dividend is growing at a constant rate of 5%, its expected dividend yield is 5% as well.
B)   a stock's dividend yield can never exceed its expected growth rate.
C)   a required condition for one to use the constant growth model is that the stock's expected growth rate exceeds its required rate of return.
D)   other things held constant, the higher a company's beta coefficient, the lower its required rate of return.
E)   the dividend yield on a constant growth stock must equal its expected total return minus its expected capital gains yield.F) A) and E)
G) All of the above

Question 6

Free cash flows should be discounted at the firm's weighted average cost of capital to find the value of its operations.

Accepted Answer

A) True 
 B)False

Question 7

From an investor's perspective, a firm's preferred stock is generally considered to be less risky than its common stock but more risky than its bonds. However, from a corporate issuer's standpoint, these risk relationships are reversed: Bonds are the most risky for the firm, preferred is next, and common is least risky.

Accepted Answer

A) True 
 B)False

Question 8

McGaha Enterprises expects earnings and dividends to grow at a rate of 25% for the next 4 years, after the growth rate in earnings and dividends will fall to zero, i.e., g = 0. The company's last dividend, D0, was $1.25, its beta is 1.20, the market risk premium is 5.50%, and the risk-free rate is 3.00%. What is the current price of the common stock?

Accepted Answer

A)   $26.77
B)   $27.89
C)   $29.05
D)   $30.21
E)   $31.42F) D) and E)
G) A) and B)

Question 9

Burke Tires just paid a dividend of D0 = $1.32. Analysts expect the company's dividend to grow by 30% this year, by 10% in Year 2, and at a constant rate of 5% in Year 3 and thereafter. The required return on this low-risk stock is 9.00%. What is the best estimate of the stock's current market value?

Accepted Answer

A)   $41.59
B)   $42.65
C)   $43.75
D)   $44.87
E)   $45.99F) C) and D)
G) A) and E)

Question 10

Stocks A and B have the same price and are in equilibrium, but Stock A has the higher required rate of return. Which of the following statements is CORRECT?

Accepted Answer

A)   stock b must have a higher dividend yield than stock a.
B)   stock a must have a higher dividend yield than stock b.
C)   if stock a has a higher dividend yield than stock b, its expected capital gains yield must be lower than stock b's.
D)   stock a must have both a higher dividend yield and a higher capital gains yield than stock b.
E)   if stock a has a lower dividend yield than stock b, its expected capital gains yield must be higher than stock b's.F) B) and C)
G) A) and B)

Question 11

Connolly Co.'s expected year-end dividend is D1 = $1.60, its required return is rs = 11.00%, its dividend yield is 6.00%, and its growth rate is expected to be constant in the future. What is Connolly's expected stock price in 7 years, i.e., what is ?

Accepted Answer

A)   $37.52
B)   $39.40
C)   $41.37
D)   $43.44
E)   $45.61F) B) and C)
G) All of the above

Question 12

The free cash flows (in millions)  shown below are forecast by Parker & Sons. If the weighted average cost of capital is 11% and FCF is expected to grow at a rate of 5% after Year 2, what is the Year 0 value of operations, in millionsσ Assume that the ROIC is expected to remain constant in Year 2 and beyond (and do not make any half-year adjustments) .
   Year: 12 Free cash flaw: −$50$100\begin{array}{lccc}	ext { Year: } & 1 & 2 \\hline 	ext {  Free cash flaw: } & -\$ 50& \$ 100 \end{array} Year:  Free cash flaw: ​1−$50​2$100​​

Accepted Answer

A)   $1,456
B)   $1,529
C)   $1,606
D)   $1,686
E)   $1,770 F) A) and B)
G) A) and C)

Question 13

The projected cash flow for the next year for Minesuah Inc. is $100,000, and FCF is expected to grow at a constant rate of 6%. If the company's weighted average cost of capital is 11%, what is the value of its operations?

Accepted Answer

A)   $1,714,750
B)   $1,805,000
C)   $1,900,000
D)   $2,000,000
E)   $2,100,000F) B) and E)
G) A) and B)

Question 14

A stock just paid a dividend of D0 = $1.50. The required rate of return is rs = 10.1%, and the constant growth rate is g = 4.0%. What is the current stock price?

Accepted Answer

A)   $23.11
B)   $23.70
C)   $24.31
D)   $24.93
E)   $25.57F) B) and E)
G) A) and D)

Question 15

Two constant growth stocks are in equilibrium, have the same price, and have the same required rate of return. Which of the following statements is CORRECT?

Accepted Answer

A)   if one stock has a higher dividend yield, it must also have a lower dividend growth rate.
B)   if one stock has a higher dividend yield, it must also have a higher dividend growth rate.
C)   the two stocks must have the same dividend growth rate.
D)   the two stocks must have the same dividend yield.
E)   the two stocks must have the same dividend per share.F) C) and E)
G) A) and E)

Question 16

A company's free cash flow was just FCF0 = $1.50 million. The weighted average cost of capital is WACC = 10.1%, and the constant growth rate is g = 4.0%. What is the current value of operations?

Accepted Answer

A)   $23.11 million
B)   $23.70 million
C)   $24.31 million
D)   $24.93 million
E)   $25.57 millionF) C) and D)
G) None of the above

Question 17

Kelly Enterprises' stock currently sells for $35.25 per share. The dividend is projected to increase at a constant rate of 4.75% per year. The required rate of return on the stock, rs, is 11.50%. What is the stock's expected price 5 years from now?

Accepted Answer

A)   $40.17
B)   $41.20
C)   $42.26
D)   $43.34
E)   $44.46F) C) and E)
G) A) and D)

Question 18

Merrell Enterprises' stock has an expected return of 14%. The stock's dividend is expected to grow at a constant rate of 8%, and it currently sells for $50 a share. Which of the following statements is CORRECT?

Accepted Answer

A)   the stock's dividend yield is 8%.
B)   the current dividend per share is $4.00.
C)   the stock price is expected to be $54 a share one year from now.
D)   the stock price is expected to be $57 a share one year from now.
E)   the stock's dividend yield is 7%.F) A) and B)
G) B) and D)

Question 19

The last dividend paid by Wilden Corporation was $1.55. The dividend growth rate is expected to be constant at 1.5% for 2 years, after which dividends are expected to grow at a rate of 8.0% forever. The firm's required return (rs)  is 12.0%. What is the best estimate of the current stock price?

Accepted Answer

A)   $37.05
B)   $38.16
C)   $39.30
D)   $40.48
E)   $41.70F) A) and C)
G) A) and B)

Question 20

The free cash flows (in millions)  shown below are forecast by Simmons Inc. If the weighted average cost of capital is 13% and the free cash flows are expected to continue growing at the same rate after Year 3 as from Year 2 to Year 3, what is the Year 0 value of operations, in millions?
  Year: 123 Free cash flow: −$2042$45\begin{array} { l c c c } 	ext { Year: } & 1 & 2 & 3 \\hline	ext { Free cash flow: } & - \$ 20 & 42 & \$ 45\end{array} Year:  Free cash flow: ​1−$20​242​3$45​​

Accepted Answer

A)   $586
B)   $617
C)   $648
D)   $680
E)   $714 F) All of the above
G) D) and E)

Exam 8: Basic Stock Valuation

Correct Answer
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Connolly Co.'s expected year-end dividend is D1 = $1.60, its required return is rs = 11.00%, its dividend yield is 6.00%, and its growth rate is expected to be constant in the future. What is Connolly's expected stock price in 7 years, i.e., what is ?

Correct Answer
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Stocks A and B have the same price and are in equilibrium, but Stock A has the higher required rate of return. Which of the following statements is CORRECT?

Correct Answer
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The projected cash flow for the next year for Minesuah Inc. is $100,000, and FCF is expected to grow at a constant rate of 6%. If the company's weighted average cost of capital is 11%, what is the value of its operations?

Correct Answer
verified

Free cash flows should be discounted at the firm's weighted average cost of capital to find the value of its operations.

Correct Answer
verified

Correct Answer
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Two constant growth stocks are in equilibrium, have the same price, and have the same required rate of return. Which of the following statements is CORRECT?

Correct Answer
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Correct Answer
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A stock just paid a dividend of D0 = $1.50. The required rate of return is rs = 10.1%, and the constant growth rate is g = 4.0%. What is the current stock price?

Correct Answer
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According to the nonconstant growth model discussed in the textbook, the discount rate used to find the present value of the expected cash flows during the initial growth period is the same as the discount rate used to find the PVs of cash flows during the subsequent constant growth period.

Correct Answer
verified

The last dividend paid by Wilden Corporation was $1.55. The dividend growth rate is expected to be constant at 1.5% for 2 years, after which dividends are expected to grow at a rate of 8.0% forever. The firm's required return (rs) is 12.0%. What is the best estimate of the current stock price?

Correct Answer
verified

Correct Answer
verified

Kelly Enterprises' stock currently sells for $35.25 per share. The dividend is projected to increase at a constant rate of 4.75% per year. The required rate of return on the stock, rs, is 11.50%. What is the stock's expected price 5 years from now?

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

If D1 = $1.25, g (which is constant) = 4.7%, and P0 = $26.00, what is the stock's expected dividend yield for the coming year?

Correct Answer
verified

Merrell Enterprises' stock has an expected return of 14%. The stock's dividend is expected to grow at a constant rate of 8%, and it currently sells for $50 a share. Which of the following statements is CORRECT?

Correct Answer
verified

A company's free cash flow was just FCF0 = $1.50 million. The weighted average cost of capital is WACC = 10.1%, and the constant growth rate is g = 4.0%. What is the current value of operations?

Correct Answer
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Which of the following statements is CORRECT, assuming stocks are in equilibrium?

Correct Answer
verified

If D1 = $1.50, g (which is constant) = 6.5%, and P0 = $56, what is the stock's expected capital gains yield for the coming year?

Correct Answer
verified

Exam 8: Basic Stock Valuation

Correct AnswerverifiedShow Answer

Connolly Co.'s expected year-end dividend is D1 = $1.60, its required return is rs = 11.00%, its dividend yield is 6.00%, and its growth rate is expected to be constant in the future. What is Connolly's expected stock price in 7 years, i.e., what is ?

Correct AnswerverifiedShow Answer

Stocks A and B have the same price and are in equilibrium, but Stock A has the higher required rate of return. Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

The projected cash flow for the next year for Minesuah Inc. is $100,000, and FCF is expected to grow at a constant rate of 6%. If the company's weighted average cost of capital is 11%, what is the value of its operations?

Correct AnswerverifiedShow Answer

Free cash flows should be discounted at the firm's weighted average cost of capital to find the value of its operations.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Two constant growth stocks are in equilibrium, have the same price, and have the same required rate of return. Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

A stock just paid a dividend of D0 = $1.50. The required rate of return is rs = 10.1%, and the constant growth rate is g = 4.0%. What is the current stock price?

Correct AnswerverifiedShow Answer

According to the nonconstant growth model discussed in the textbook, the discount rate used to find the present value of the expected cash flows during the initial growth period is the same as the discount rate used to find the PVs of cash flows during the subsequent constant growth period.

Correct AnswerverifiedShow Answer

The last dividend paid by Wilden Corporation was $1.55. The dividend growth rate is expected to be constant at 1.5% for 2 years, after which dividends are expected to grow at a rate of 8.0% forever. The firm's required return (rs) is 12.0%. What is the best estimate of the current stock price?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Kelly Enterprises' stock currently sells for $35.25 per share. The dividend is projected to increase at a constant rate of 4.75% per year. The required rate of return on the stock, rs, is 11.50%. What is the stock's expected price 5 years from now?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

If D1 = $1.25, g (which is constant) = 4.7%, and P0 = $26.00, what is the stock's expected dividend yield for the coming year?

Correct AnswerverifiedShow Answer

Merrell Enterprises' stock has an expected return of 14%. The stock's dividend is expected to grow at a constant rate of 8%, and it currently sells for $50 a share. Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

A company's free cash flow was just FCF0 = $1.50 million. The weighted average cost of capital is WACC = 10.1%, and the constant growth rate is g = 4.0%. What is the current value of operations?

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT, assuming stocks are in equilibrium?

Correct AnswerverifiedShow Answer

If D1 = $1.50, g (which is constant) = 6.5%, and P0 = $56, what is the stock's expected capital gains yield for the coming year?

Correct AnswerverifiedShow Answer

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